Conceptin Property insurance basics
Drill10 items
Actual cash value vs replacement cost
Actual cash value (ACV) is replacement cost minus depreciation. Replacement cost (RC) pays to repair or replace with materials of like kind and quality and takes nothing off for age. Which one applies is set by the form, and under the 2011 HO-3 even replacement cost on a building waits for the repair.
Two ways to put a number on a loss
Both methods start from the same figure: what it costs today to replace the damaged property with something of like kind and quality. RC pays that figure. ACV subtracts depreciation first, so an insured who owned a worn item collects a worn item's worth. That is the indemnity idea from property insurance basics in its purest form, and RC is the deliberate step past it that the extra premium buys.
Where depreciation comes from
Depreciation is the part of the item's useful life already used up, with wear and obsolescence feeding it. Two other measures sit close by. ACV is not market value, the price a used item would fetch, and it is not the original purchase price less depreciation. Both sound like sensible ways to price a used thing, and both start from the wrong number. Some states let courts weigh any evidence bearing on value; that approach is the broad evidence rule.
A third method sits between the two. Functional replacement cost repairs with cheaper materials that do the same job, which is how the HO-8 treats older homes, where rebuilding with the original materials would be out of proportion to the home's value.
Four methods side by side
| Point | ACV | RC | Functional RC | Agreed value |
|---|---|---|---|---|
| Starts from | Cost to replace today | Cost to replace today | Cost of equivalent materials | An amount set in advance |
| Depreciation | Subtracted | Not subtracted | Not subtracted | Not used |
| Where you meet it | DP-1; HO-3 contents; CP 00 10 default | HO-3 and DP-2/DP-3 buildings insured to 80% | HO-8 | CP 00 10 option |
| Usual confusion | Market value | Paid before repair | Same as RC | Same as RC |
Insurers and states can modify the ISO forms; the table follows the 2011 HO-3, the DP 2002 program and CP 00 10 10 12.
ACV from expected life
WorksheetActual cash value
Wall-to-wall carpet with a 12-year expected life, damaged at 9 years; $4,800 to replace
- Replacement cost
- $4,800
- Expected life
- 12 years
- Age at loss
- 9 years
- Life used up9 ÷ 123/4
- Depreciation3/4 × $4,800$3,600
- Actual cash value$4,800 − $3,600$1,200
Settled at ACV$1,200
Under the 2011 HO-3, carpeting is on the list settled at ACV even when attached to the building, with awnings, household appliances and outdoor antennas. The $3,600 between the two figures is the whole difference between the methods.
A home insured below 80%
WorksheetWorked example
2011 HO-3: full replacement cost $400,000, Coverage A $256,000, roof damage costing $30,000 to repair, ACV of the damage $21,000
- Full replacement cost
- $400,000
- Coverage A limit
- $256,000
- Cost to repair
- $30,000
- ACV of the damage
- $21,000
- 80% of replacement cost80% × $400,000$320,000
- Limit as a share of that$256,000 ÷ $320,0000.80
- Proportion of the repair cost0.80 × $30,000$24,000
- Greater of ACV or proportion$21,000 vs $24,000$24,000
Settlement once repaired$24,000
Deductible left out. Until the repair is finished the insurer pays ACV, $21,000; the proportional figure follows once the work is done.
Price it, then check the form
0 of 10 answered · 0 right
Work each one from the loss settlement wording of the form it names; what would seem fair to the insured does not enter into it.
Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.
- Item 01
Actual cash value is generally calculated as:
- AStarting from the original purchase price is wrong, because ACV starts from today's replacement cost.
- BCorrect: actual cash value is the current replacement cost of like kind and quality, minus depreciation.
- CReplacement cost with no deduction is replacement cost valuation, not ACV.
- DMarket value is what a buyer would pay, and the deductible is a separate step, not part of how ACV is measured.
- Item 02
Which valuation method pays to repair or replace damaged property with materials of like kind and quality, with no deduction for depreciation?
- ACorrect: replacement cost pays to repair or replace with like kind and quality, with no deduction for depreciation.
- BActual cash value subtracts depreciation, so it fails the 'no deduction' test.
- CFunctional replacement cost also skips depreciation but uses cheaper materials that do the same job, not like kind and quality.
- DMarket value is what a buyer would pay, not the cost to repair or replace.
- Item 03
A storm destroys the 15-year-old roof on Steve's home. A new roof costs $10,000, and his insurer pays the full $10,000 with no deduction for the roof's age. Which valuation method does his policy use?
- ACorrect: paying the full cost of a new roof with no deduction for 15 years of wear is replacement cost.
- BFunctional replacement cost pays for cheaper, functionally equivalent materials, which would not normally mean a full like-kind roof.
- CActual cash value would subtract depreciation for the roof's 15 years of wear.
- DMarket value is what a buyer would pay for the property, not the cost of a new roof.
- Item 04
A roof with an expected life of 20 years is destroyed after 5 years. A new roof of like kind and quality would cost $12,000. What is the actual cash value of the loss?
- A$9,600 applies only 20% depreciation, but 5 of 20 years is 25%.
- B$12,000 is the replacement cost, with no depreciation taken.
- C$3,000 is the depreciation itself, not the value of the loss.
- DCorrect: 5 ÷ 20 = 25% depreciation, so ACV = $12,000 − $3,000 = $9,000.
- Item 05
Under a typical replacement cost loss settlement provision, an insured decides not to repair or replace the damaged property. The insurer pays:
- AFull replacement cost is paid only after the property is actually repaired or replaced.
- BCorrect: a replacement cost provision pays only ACV when the insured does not repair or replace.
- CThe insured does not forfeit the claim by choosing not to rebuild; ACV is still owed.
- DMarket value is not the settlement basis under a replacement cost provision.
- Item 06
When determining actual cash value, some courts consider replacement cost, depreciation, market value, obsolescence, and any other relevant factor. This approach is called the:
- AFunctional replacement is a loss-settlement basis using cheaper equivalent materials, not a court's method for finding ACV.
- BProximate cause decides whether a covered peril caused the loss, not how the loss is valued.
- CThe principle of indemnity is the goal the rule serves, not the rule itself.
- DCorrect: under the broad evidence rule, a court weighs every relevant factor, including market value and obsolescence, to fix actual cash value.
- Item 07
Which property valuation method most closely follows the principle of indemnity?
- AReplacement cost pays new for old and can leave the insured better off than before the loss.
- BCorrect: actual cash value pays what the used property was worth, restoring the insured without profit, which is indemnity.
- CA valued policy law pays a fixed amount on a total loss that may exceed the actual loss.
- DAgreed value pays a pre-set amount that may not match the actual loss.
- Item 08
Unless the declarations show otherwise, the Building and Personal Property Coverage Form (CP 00 10) values covered property at
- AAgreed value is an optional coverage that applies only when shown in the declarations.
- BCorrect: the CP 00 10 valuation condition defaults to actual cash value.
- CFunctional replacement cost needs its own endorsement; it is never the default.
- DReplacement cost is an optional coverage shown in the declarations, not the default.
- Item 09
A DP-3 dwelling insured to 100% of its replacement cost, with a $200,000 Coverage A limit, has a $2,000 covered loss whose actual cash value is $1,400. Before any repairs are made, how much will the insurer pay?
- A$1,400 is the actual cash value that is paid before repairs on larger losses, but a loss under both 5% of the limit and $2,500 is exempt from that holdback.
- BCorrect: the dwelling is insured to 100% of replacement cost, and a loss below both 5% of Coverage A ($10,000) and $2,500 is paid at replacement cost whether or not repairs are done.
- C$0 wrongly assumes nothing is paid until repairs are finished, when the policy pays at least actual cash value in the meantime and here pays full replacement cost.
- D$1,600 has no basis in the loss settlement clause, since it is neither the actual cash value nor the replacement cost of the damage.
- Item 10
Lena's HO-3 has no endorsements. A covered fire destroys her 6-year-old sofa. How will the insurer value the sofa?
- AReplacement cost on contents needs the personal property replacement cost endorsement, which Lena does not have.
- BCorrect: an unendorsed HO-3 settles personal property losses at actual cash value, replacement cost minus depreciation.
- CFunctional replacement cost is a basis for older dwellings, not furniture.
- DAgreed value applies only to scheduled items shown in the declarations, not an ordinary sofa.
ACV and RC in practice
Is actual cash value what the property would sell for?
No. Market value is a separate method. ACV starts from today's cost to replace and subtracts depreciation, so a ten-year-old water heater is priced from a new one, not from a used-appliance market.
Does a dwelling policy pay replacement cost?
The DP-1 settles at ACV. The DP-2 and DP-3 pay RC on the dwelling and other structures when insured to at least 80% of replacement cost; DP-1 vs DP-2 vs DP-3 lays out the rest of the differences.
Which homeowners form uses functional replacement cost?
The HO-8, written for older homes. It repairs with functionally equivalent, less costly materials and covers basic perils; the other forms are on the homeowners insurance page.